Political, legal, religious and economic organization of a society.

The legal system is the meta-institution that spells out the formal rules of the game and the manner in which they are enforced.

Legal system vary across societies. Many small-scale societies rely on informal and decentralized legal system based around ostracism and feuding.

• The legal system differ considerably from the lar-scale agrarian states, let alone highly commercialized, market-oriented societies.
  (Kandori, 1992; Dixit, 2004): (43-44)
• Small-scale societies rely on repeated interactions and social sanctions to enforce oder.
• In small, closely knit socieiteis, these mechanisms are powerful in enforcing cooperation.
• Individuals in these societites expect to interact with each other again in the future, thus have incentive to develope a reputation for fair dealing.
• It is the threat of missing out future reward from violence or theft in the present.
  However, mechansims dependet on the logic of repeated dealings may be unable to support cooperation in large-scale soceities, where people are unlikely to interact consistently.
• As societies become more complex, formal legal system emerges.
• A formal legal system prescribes rules the outline approporate and inappropriate behaviors and specify punishment for those who disobey the law.
• The first such legal system that we have a record is the Code of Hammurabi, dated to 1754 BCE
  Legal system sturuct the incentive that individual face.
  The code of Hammurabi:
• The code reinforced existing power strucutre and a hierarchical social system
• The laws were based on indentity rules rather than impersonal rules(Johnson and Koyama, 2019)
  - The punishment varies accoridng to the social identity of the parties involved
  - Such rules tend to entrench the power of exisitng elites.
  Impersonal rules
• Commtted to treting individual the sme regardless of their social identity.
• More consistent with the production of property
• Enable impersonal rather than personal exchange and more likely to promote investment and economic growth.
• The difference between identity rules and impersonal rules is the difference between rule by law and rule of law.
• Moving away from such a societyu to one in which rulers are constrianed by the law was key to economic growth(Greif and Rubin, 2021)
  Societies that have a strong rule of law tend to be richer.
• Fuller(1969)
  • Rule of law requires:
    • A concet of legal equality
      • All individual are equally subject to the law
    • The law should be prospective, open and clear
    • The law should be stable over time
    • The making of laws should be open and guided by impoersonal rules
    • The judiciary should be politically independent
    • Legal instituions, such as courts, should be accessible to all.
    • The rules should be general and apply uniformly.
• Importantly, rule of low depends on a nexus of different institutions.
• Hayek, 1960; Cooter, 1997; Weingast, 1997
  • Provides a check on the power of government, guaranteed each individual their own private sphere of non-interference, and offered a platform of institutional stability conducive to long-run economic growth.
• Dicey, 1908, pp 198-9
  • Rule by law provides the stability and certainty tht enables invidividuals to truck, barter and exchange their way to prosperity

• Harold Beman(1983), Law and revolution
  • The legal tradition origins in ancient ROme
    • Roman economy was commercialized and market-oriented.
  • Arruñada, 2016
    • Legal scholars of Rome developed a theory of contract and property
    • the law was largely lost in Western Europe following the collapse of the Western Roman Empire.
    • During this period, Germanic or customary legal codes dominated
      • These laws were based on identity rules and better suited to governing small-scale socieities rather than providing a framework for impersonal trade
  • Fernández-Villaverde, 2022
    • Beginning in the 11th and 12th centruries, Roman law was rediscovered and priciples underlying the ROman law of contracts began to be studied by lawyers of canon law in univerties like that of Bologna
• English common law
  • At roughly the same time, a different legal system was emerging whe Germanic and local legal systems were unified into common law during the 12th and 13th centuries.
    * English common law were was influenced by Roman law, but only indirectly via canon law
  • Great lagal scholars Pollack and Maitland(1895), and Dicey(1908)
    Saw English common law as it evolved in the Middle Ages as playing a critical role in enshirining and protecting property rights.
    They reasoned that common law provided a set of stable but adaptive principles that in later centuries enabled more complex organizational form to emerge.
  • La Porta, de Silanes, Shleifer, and Vishny (1998)
    • English common law tradition is associated with better protection of property rights, less tedious regulations and a more favorable environment for maket comparted to system based on Roman Law.
    • La Porta et al
      • Protection for investors was systematically stronger in common law countires.
        • Common law countries tend to give both shareholdera and creditors the strongest rights, regardless of GDP.
        • This is important for financial development becasue this limit the extent where corporate insiders can expropriate investors.

• If insitutions form the "rules of the game" that people play, one reason that people around the world play by different rules is the political institutions of their society.
• Political insitutions shape how we act, it generally have osmething close to a monopoly on violence, and can use it to incentivze people to act a certain way
• The distribution of a socieity's resources is higly dependent on political instituions.
  • Resource distribution often reflect the desire of those with political power as well as the desires of those who can keep them in power.
    • In a democracy, it might be "the people"
    • Elseware, it could be a selected group of warlords.
  • Political institiuions are also crucial for encouraging economic activity.
  • Instituions designed to protect rights, limit confiscation and encourge investment in public goods are more likely to incentivize investment and economic exchange
• Political instituions vary widely
  • This variation is one of the leading cause and consequence for economic development
  • Instituions can be measure in various ways:
  • Marshall and Elzinga-Marshall, 2017(pg 47-49)
    • Polity score index measurres country from absolute democracy to absolute autocracy.
    • These data track well with economic development
    • This is also true of the democracy index.
  • Intitutionak economics argue that political instituions matter for growth as they shape incentives in the socieity.

• Acemoglu and Robinson, 2006
  • Those who control political institutions can use them to increase their control fo economic resources and therefore their political power
    • This is one reason why instituions can be a source of lasting poverty
• (Acemoglu and Robinson 2012b)
  • Argue that whether political instituions are good or bad for growth hinges on whether thye are inclusive or extractive.
  • Inclusive instituions create broad-based economic incentives and opporuntities.
    • Tend to be characterize by a brod distribution of political power
    • This make it tough for one group to tranfress the rights of another
    • Democratic instituions are often seen as relatively challenged, where anyone can run and unpopular officials can be vote out.
  • Extractive economic and political institutions do not create broad-based incentives
    • Power is held by a small group of powerful elites who are subject to few constraint from the rest of society.
    • Economics development can be hard to achieve as opporunities are limited
    • It can be difficult to have the fund used for public good and there are little incentive for investment due to insecurity, and economic tend to stagnate.
• What is inclusiveness: (pg 50-52)
  • Institutions can be inclusive for some but still extractive for others.
  • Ober 2018
    • Atheanian democracy was very inclusive system for adult male Athenians, but is highly extractive to its slave population.
  • Epstein 2000
    • Republican Florence grant its citizen civil and political rights but imposed extractive instituions on neiboring town and cities.
  • Acemoglu and Robinson(2019) (50-52)
    • Introduced "narrow corridor to liberty"
      • Inclusive instituions are made possible by a functioning state, able to repress powerful intest groups or corrupt elites.
      • Inclusive instituions will also be upended overan overly powerful state.
      • Civil socieity need to develop alongside growth of state power to limit state power.
      • The state need to be not too weak nor too strong
        • Too strong, it could knock out the cociety and result in despotic rule and extractive instituion
        • Too weak, we get anarchism, tribalism and wek public good provision.
  • North, Wallis, and Weingast (2009) (50-52)
    • call the "natural state" and the "open-access order".
    • In the natural state, which was the only form of political organization more or less anywehere prior to 18th c.
      • personal relationship form the basis of social organization
      • Treat different people according to who they are and their stand in the social and economic hierarchy.
        • The law, too
      • limited growth
    • Long run economcs development rwrequire a society to transition to the open-access order.
    • A type of political systems similar to what (Acemoglu and Robinson 2012b) called inclusive.
    • Empahsis is on how easy to set up a rival political party or establish a large business without getting favor from political insiders.
  • (Tullock 1967)
    • The cost of rent ncludes all the resources economic actors expend in pursuit of them
      • These cost can be very large

The commercial revolution was characterized by the rivival of long-distance trade, spanned political borders and juristictions.
Yet, there were no political authorities capable of enforcing contracts between merchants opearting in different cities.So how could punishment be inforced?

• Delay between goods or payment arrival (pg 52)
  • Flemish merchant pays on credit due to shortage of hard specie
  • Possibility of Flemish merchant reneging on promise
  • Uncertainty about Flemish merchant delivering payment
  • Flemish merchant has choice to transfer money or not after receiving wool
  • Lack of incentive for Flemish merchant to transfer money
  • Future expectations of regular trade affect cooperation
  • English merchant refuses to trade without upfront and immediate payment
  • Potential gains from trade remain unrealized.
• (Grief 2000) (pg 53-54)
  • Call the situtation above the fundamental problem to exchange
  • Trade limited to cases where either a spot exchange can take place or merchants trust each other enought to pay on credit.
  • Trade is extremely costly, a lack of information about the quality of goods could generate similar problems.
  • Manufactured goods might have suffered from defects that were hard to detect on purchase but apparent later one
  • He used game theory to explain how merchat communities in the middle ages attempted to resolve the undamental problem of exchange
    • Greif, 1989, 1993, 2006 (pg 53)
      • He consider Jewish trader in Muslim North Africa during the 10th and 11th centuries.
        • Conducting long-distance trade in the absence of a reliable and centralzed leagam system face the problem of trade.
        • They need to hire agent
          • Thy mutilize multilatreal punishment stratgy, a situation inwhich multiple parties agree to punish anyone who cheats any individual in the good.
          • Effective due to their close-knit community
    • Greif, 2002, 2006 (Pg 53)
      • Documents that community responsibility enable these merchants to overcome the problem of exchange
        • Community responsibility meant that individual merchats were made responsible for the behavior of their peers.
        • The good of merchant can be sized simply because another merchat cheated or refuse to pay a loan.
        • The cost of an indiviudal merchant cheating was borne by the community
          • This utilized internal community enforcement to deter domestic merchants
• Richardson 2008(pg 53)
  • Purchaser alone bore the consequences of defective purchases, becasue they had few remedies.
  • Merchants had an incentive to pass on defective good to traders they met anonymouslly and to retain quality product for personal exchange.

An important set of instituions that played a role in the COmmerical Revolution were guilds.
Craft and merchant guilds regulate the European economy from the Middle ages to the industrial revolution
Craft guilds dominated urban life for much of the period between the 12th and 16th centuries. To participate in a trade, one generally had to be a member of a guild.

• Guild membership was restricted and lengthy apprenticeship are required before becoming a master. They aided local political authorities in tax collection and kept their privileges by allying with local political authorities(Ogilvie, 2019) (pg 64-65)
• Craft guilds are controversal.
  • Were guild rent-seeking instituions that imposed costs on wider economy
  • Or serve important economic functions
• In theory, possibly both.
• At the same time, thye could have helped to resolve coordination problems, protect mercahnts and resolve market failures.
  Richardson (2008) (pg 54):
• Craft guilds helped resolve problems of asymmetric information such as verifying product quality.
• They ahve incentive to keep product quality high so sell ouside of city
  Epstein(1998)
• Argued that the craft guilds and the apprentice system played a critical role in incentivizing investment in industry-specific humand capital
• Work of master guild mambers requires high skills and could take years to learn
• The restrction of labor via apprenticeship system was the only way for masters to recoup the cost of transferring skills
• Teaching these skills is a cost to masters costs with little immediate payoff, they needed to recoup costs later to make it worth it.
• The rent via the guild system provided these incentive, and could have incentivized innovation
  De la Croix, Doepke, and Mokyr (2017) (pg 55)
• Showed that these novel techniques slowly spread througout Europe via journeymen, going from town to town and employ the tacit knowledge of how to do things in their provous employment, and may have encouraged innovation and the difftion of best practiced techniques.
  Ogilvies(2019)
• Argues that craft fuilds were rent-seeking organizations that did best bu their members but often imposed cost on rest of society.
• She provides evidence that guilds routinely restrited the economic activity of non-guild members, lobbied governments for previleges, and enforce their previliage though fines, fees, confiscations and occational violence
• They oppose innovation when it challenges profit.
  Greif, Milgrom, and Weingast (1994) (pg 56)
• One purpose of the merchant guild was to serve as a collective voice against rulrers.
• If a merchange had his rights transgressed, the guild would boyscott the city.

In a limited governemnt, the powers of the ruling elite are constrained.
There are checks on authority in each part of government. Such checks help economies grow.
They limit the ability of any group to extract too much.

How does states acquire fiscal capacity:

• Major free-rider problem exist if it is difficult to enforce punishment for tax evasion.
• If the problem is solved, public goods could be produced.
• Fiscal capacity is generally associtaed with state capacity:
  • The state's ability to
    • implement policy
    • render justice
    • protect its citizen
  • These are some of the key things a state can provide to promote economic growth.
  • Solving these problem create better long-run economic prospect
• State capacty s dfferent from the size of the state
  • An expansive state with a large but inefficient public bereaucracy may attempt but fail to achieve many goals.
• Over the long run, one way European states built fiscal capacity was solving the credible commitment problem they faced.
  • Rulers without constraints or accountability cannot make credible promises.
  • Medieval and early modern kings often broke promises to their subjects.
  • Difficulty in holding kings accountable due to their absolute power.
  • King Philip II of Spain was notorious for defaulting on debts.
  • Tax revenue in England increased when the commitment problem was solved by establishing a permanent Parliament.
• Another problem of pre-industrial states is that they tended to be fiscally fragmented.
  - As a result, they suffer from local tax free-riding
  - Fiscal centralizaation overcome the free-rider problem and increase state revenue
  - Centralization complemented market expasion and divison of labor
  - Facilitated responsible fiscal policies, lowering credit risk.
  - Limitation on government authority and centralized fiscal system allowed states to borrow at low cost.(Dinececco,2009)
  - The led to a significant increase in European government revenue between 16-19th centuries.
  Why and how some states income places and at some times invest in fiscal capacity:
• In early modern Europe, parliment played a key role in authorizing and legitimating tax collection.
• Constraing the arbitary power of the monarch, parliaments also strenthed rulers by giving them the ability to make credible commitments.
  - Enables rulers to collect money and fith lower and more expsneive wars
  Tilly
  1975,1990:
• War made the state, and the state made way:
  - Summarized this matter, war was the main preoccupation
  - States spent most of their revenue or warfare or paying debts in previous war
  - All pre-morether state were preoccupied with war, Tilly(1990) discerned three paths of state formation:
  - ### Coercive-intensive
  - Built from and for war
  - Not just tax populations, but directly mobilized labor and outher resources through conscription
  - Example:
  - Russia:
  - 17th c. Russia involved in war on its western frontier one year out for every two, and have continuious war on south and east frontier(Pipes, 1974)
  - Force over a greater expanse of people and demand tax, did not lead to long-run economic outcome due to low incentives to invest in capital
  - ### Capital-intensive
  - Expanded as their wealth expanded
  - Also oftern involved in warfare, but protect the citizen's right, espeically when related to commerce。
  - Able to collect tax from economic elite in return for protection.
  - City-states can borrow at low ratte becasue they are run by and for merchants(Stasavage,2011)
  - They have interest in maintaining credit-worthiness of the state.
  - ### A mixture
  - The path to the modern economy(Tilly, 1990)
  - Encourge capital accumulation and capacity to tax its population
  - Capital were willing to provide tax in exchange for protection of property rights.
  Hoffman (2015)
• A modified version of this thesis
• Focuses on incessant European warfare as prime mover of economic success in Europe
• Emphasizing on role of warfare in innovation which allowed colonization.
  Rosenthal and Wong(2011)
• European warefare disproportionate affected country side since cities are more fortified
• Frequent warfare led to concentration or trande and manufature in urban area, as a result:
  - Trade and manufacturing thrived in European urban areas.
  - Higher urban wages in Europe incentivized investment in labor-saving technologies.
  Warefare played a significant role in shaping instituions, but not inherently beneficial as it is destructive:
• Direct costs of ware include destruction and the diversion of resources toward defense
• Opportunity cost arise form investment in mlitary instead of other productive area
• Indirect cost are harder to measure and include the impact of war on institutions.
• Native historical account portray war as good are often mistaken